Why Is Piramal Enterprises Share Price Falling?

These three reasons have sent the share price of Piramal Enterprises down by 26% this year.

Why Is Piramal Enterprises Share Price Falling?

Piramal Enterprises demerger fails to enthuse investors

Have you ever been in a situation where you were trying to do something good, but it backfired on you?

For example, you were just helping a little boy in crossing the road, but it turned out you just parted the kid from his mother, who was trying to catch hold of her son.

Diversified company Piramal Enterprises is undergoing a similar fate right now. Ever since it announced the demerger of its pharma business last year, the stock has come under pressure.

Piramal went through this demerger as its financial business was contributing over 50% of revenues, so it only made sense to separate the pharma business so it can flourish on a standalone level.

But the demerger plans have not excited investors. In the past one year, the share price of Piramal Enterprises has fallen by 26%. YTD performance shows the same performance.


#1 Demerger Fails To Enthuse Investors

Piramal Enterprises' board, in October 2021, approved a demerger of its pharma business. In August 2022, the said demerger was approved by the market regulator.

The demerger will result in a new entity 'Piramal Pharma'. Piramal Pharma will run businesses like Piramal Pharma Solutions, an integrated contract development, and manufacturing organiSation; Piramal critical care, and the India consumer healthcare business selling over-the-counter products.

Piramal Enterprises will focus on the finance arena of the conglomerate. Hence the demerger will simplify the corporate structure and create two industry-focused listed entities.

Piramal Pharma is expected to be listed in the third quarter of the financial year 2022-23. The existing shareholders of Piramal Enterprises will get four shares of Piramal Pharma for every share held in Piramal Enterprises.

The merger is set to be recorded today i.e., 1 September 2022.

It appears that while this demerger will have long term tailwinds, investors are not enthused about it at the moment. Ever since the demerger was announced, the stock has seen a decline.

Remember how HDFC Bank share price was falling owing to uncertainties about the merger? Piramal's demerger could be another such case.

#2 Poor Financial Performance

The financial performance of Piramal Enterprises has not been up to the mark.

On a superficial glance, it may look like the financial performance for the financial year 2021-22 was bright because its revenues increased by 12%.

However, if you take a detailed look into the financials, you'll observe the setbacks. The operating profit margin has fallen by 10%. Even the net profit margin has barely increased by 1%.

In fact, the financial performance of the past five years has been disappointing in one way or the other. Either the sales were down, or the profit was declining.

7b9l6dm8Also, the company recently reported poor quarterly results. Owing to higher expenses, the company reported a 9% decline in net profit.

Deteriorating financial performance on annual as well as quarterly basis don't paint a good picture and that could be the reason pushing down Piramal Enterprises' share price.

#3 Promoter Divestment

Promoter holding in the company indicates their trust in the company. Hence, if promoters are investing more in the company, investors' trust in the company will also increase.

Piramal Enterprises' promoters held a stake of 46.1% as on March 2021. However, the promoters have been gradually divesting their stake in the company since then. As of 30 June 2022, the promoters stake was reduced to 43.5%.

For more details, check Piramal Enterprises' latest shareholding pattern.

Investment Takeaway

"If one thing goes wrong, everything else will, and at the same time."

- Peter Drucker - Father of modern management

This quote defines the current situation of Piramal Enterprises.

The demerger, which is supposed to unlock value for shareholders, has not enthused new investors.

The demerger is set to create a win-win for all parties - investors, customers, and the company - as a whole. But only in the long run.

All good things take time. The positive effect of the demerger will be felt when both companies will be able to show the profitability of the demerger.

The short-term future of Piramal Enterprises may be dull, but overall, the long-term future may be bright if things go as planned.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)